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Answer: C LO: 3 Type: A

MULTIPLE CHOICE QUESTIONS


4. Factory Oak produces various wooden bookcases, tables, storage
1. Which of the following statements is (are) true about non-value- units, and chairs. Which of the following would be included in a
added activities? listing of the company's non-value-added activities?
A. Assembly of tables.
I.Non-value-added activities are often unnecessary and B. Staining of storage units.
dispensable. C. Transfer of chairs from the assembly line to the staining
II.Non-value-added activities may be necessary but are being facility.
performed in an inefficient and improvable manner. D. Storage of completed bookcases in inventory.
III.Non-value-added activities can be eliminated without E. Both "C" and "D."
deterioration of product quality, performance, or perceived
value. Answer: E LO: 3 Type: N

A. I only 5. Airstream builds recreational motor homes. All of the following


B. II only. activities add value to the finished product except:
C. III only. A. installation of carpet.
D. I and II. B. assembly of the frame to the chassis.
E. I, II, and III. C. storage of the vehicle in the sales area.
D. addition of exterior lights.
Answer: E LO: 3 Type: RC E. final painting and polishing.

2. During a recent accounting period, Marty's shipping department Answer: C LO: 3 Type: N
processed 26 orders. Each order typically takes four hours to
complete; however, the average time increased to five hours 6. In an attempt to cut non-value-added costs, companies may:
because of various departmental inefficiencies. If shipping labor is A. reduce the scope of selected activities.
paid $14 per hour, the company's non-value-added cost would be: B. eliminate selected activities.
A. $0. C. combine selected activities.
B. $56. D. do "A" and "B" above.
C. $364. E. do "A," "B," and "C" above.
D. $1,456.
E. $1,820. Answer: E LO: 3 Type: RC

Answer: C LO: 3 Type: A 7. Customer profitability analysis is tied closely to:


A. just-in-time systems.
3. Stanley Corporation takes eight hours to complete the setup B. activity-based costing.
process for a certain electrical component, with the setup cost C. job costing.
averaging $150 per hour. If the company's competitor can D. process costing.
accomplish the same process in six hours, Stanley's non-value- E. operation costing.
added cost would be:
A. $0. Answer: B LO: 4 Type: RC
B. $150.
C. $300. 8. Generally speaking, companies prefer doing business with
D. $900. customers who:
E. $1,200. A. order small quantities rather than large quantities.
B. often change their orders.

Chapter 6 139
C. require special packaging or handling. product is sold at its estimated market-driven price is termed:
D. request normal delivery times. A. kaizen costing.
E. need specialized engineering design changes. B. product costing.
C. target costing.
Answer: D LO: 4 Type: RC D. full costing.
E. strategic costing.
9. Which of the following can have a negative impact on a sale's
profitability? Answer: C LO: 5 Type: RC
A. Number of required sales contacts (phone calls, visits, etc.).
B. Special shipping instructions. 13. The four tasks that follow take place in the concept known as
C. Accounts receivable collection time. target costing:
D. Purchase-order changes.
E. All of the above. 1—Value engineering.
2—Establish a target selling price.
Answer: E LO: 4 Type: N 3—Establish a target cost.
4—Establish a target profit.
10. Horton Corporation's customers differ greatly with respect to
number of required sales contacts (e.g., phone calls and sales Which of the following choices correctly depicts the sequence of
visits), account payment patterns, and design/engineering change these tasks?
orders. Which of the following choices likely denotes an ideal A. 1, 3, 4, 2.
customer from Horton's perspective? B. 3, 1, 4, 2.
Required Account Design/Engineering C. 2, 4, 3, 1.
Sales Contacts Payment Patterns Change Orders D. 2, 3, 1, 4.
A. Many Slow Many E. Some other sequence not listed above.
B. Many Rapid Many
C. Few Slow Many Answer: C LO: 5 Type: RC
D. Few Rapid Few
E. Many Rapid Few 14. Of the five tasks that follow, which one is typically performed
second when using the concept known as target costing?
Answer: D LO: 4 Type: N A. Compute a target cost.
B. Determine a target selling price.
11. Which of the following is an appropriate way to analyze customer C. Calculate a target profit.
profitability? D. Select a cost driver.
A. The cost of servicing a customer computed as a percentage E. Undertake value engineering.
of the customer's gross margin.
B. The cost of servicing a customer computed as a percentage Answer: C LO: 5 Type: RC
of the customer's gross margin, compared against company
or industry norms. 15. Robertson, Inc., uses target costing and sells a product for $36
C. The cost of servicing a customer computed as a percentage per unit. The company seeks a profit margin equal to 25% of
of the customer's gross margin, examined over several years. sales. If the current manufacturing cost is $29 per unit, the firm
D. Choices "A" and "B." will need to implement a cost reduction of:
E. Choices "A," "B," and "C." A. $0.
B. $2.
Answer: E LO: 4 Type: RC C. $9.
D. $20.
12. The costing technique that produces a stipulated profit when a E. $27.

140 Hilton, Managerial Accounting, Seventh Edition


Answer: B LO: 6 Type: RC
Answer: B LO: 5 Type: A
20. The comparison of a company's practices and performance levels
16. Collins Corporation uses target costing and sells a product for $50 against those of other organizations is most commonly known as:
per unit. The company seeks a profit margin equal to 40% of A. benchmarking.
sales. If target-costing calculations revealed a need for a $5 cost B. continuous improvement.
reduction, the firm's current manufacturing cost must be: C. re-engineering.
A. $20. D. comparative analysis.
B. $25. E. kaizen business analysis (KBA).
C. $30.
D. $35. Answer: A LO: 7 Type: RC
E. some other amount.
21. Which of the following techniques does not logically belong with
Answer: D LO: 5 Type: A the others?
A. Product costing.
17. The process of continual cost reduction during the manufacturing B. Value engineering.
phase of an existing product is termed: C. Kaizen costing
A. kaizen costing. D. Continuous improvement.
B. product costing. E. Benchmarking.
C. target costing.
D. market costing. Answer: A LO: 5, 6, 7 Type: N
E. strategic costing.
22. Which of the following statements about re-engineering is (are)
Answer: A LO: 6 Type: RC true?

18. Kaizen costing refers to: I.Re-engineering is the complete redesign of a process in an
A. radical cost reductions during the design phase of a product. attempt to find creative new ways to accomplish an
B. radical cost reductions during the manufacturing phase of a objective.
product. II.Re-engineering involves more of a "giant leap" than the concept
C. small, continual cost reductions during the design phase of a of kaizen.
product. III.Re-engineering may entail high risks.
D. small, continual cost reductions during the manufacturing
phase of a product. A. I only.
E. the use of operational costing in out-of-control manufacturing B. I and II.
situations. C. I and III.
D. II and III.
Answer: D LO: 6 Type: RC E. I, II, and III.

19. Which of the following would least likely be a feature or goal that Answer: E LO: 7 Type: RC
is associated with a kaizen-costing program?
A. Elimination of waste. 23. The contemporary management tool that focuses on restrictions
B. Use of overhead application rates. that limit a company's ability to maximize long-run profit is
C. Implementation of employee suggestions. commonly known as:
D. Improvements in production time. A. simulation.
E. Reduction of non-value-added activities and costs. B. linear regression.
C. constraint manipulation.

Chapter 6 141
D. the theory of constraints. II.The pull method greatly reduces work-in-process inventory.
E. game theory. III.The pull method reduces waiting time and the associated non-
value-added cost.
Answer: D LO: 7 Type: RC
A. II only.
24. A company that adopts a just-in-time production system would B. I and II.
attempt to reduce and/or eliminate: C. I and III.
A. raw-material inventory. D. II and III.
B. raw-material inventory and work-in-process inventory. E. I, II, and III.
C. raw-material inventory, work-in-process inventory, and
finished-goods inventory. Answer: E LO: 8 Type: RC
D. work-in-process inventory.
E. finished-goods inventory. 28. In the pull method of coordinating a production process:
A. departments early in the production process continually make
Answer: C LO: 8 Type: RC components in order to ensure that later departments do not
run out.
25. Which of the following inventories would a company try to reduce B. nothing is manufactured at a work center until a need is
and/or eliminate under a just-in-time system? signaled from a subsequent process.
Raw-Material Work-in-Process Finished-Goods C. work-in-process inventories are increased throughout the
Inventory Inventory Inventory plant.
A. No No Yes D. production employees never have idle time, resulting in
B. No Yes No increased efficiency.
C. Yes No No E. defective products are "pulled" off the line and sent to a
D. Yes No Yes special department for rework.
E. Yes Yes Yes
Answer: B LO: 8 Type: RC
Answer: E LO: 8 Type: RC
29. A Kanban:
A. is used in conjunction with activity-based costing.
26. Marion Corporation, which produces unique office furniture, B. facilitates quick and inexpensive setups of machines.
recently installed a just-in-time production system. The various C. helps train workers to do a variety of assignments.
steps in the company's manufacturing process are coordinated by D. initiates production in a particular work center.
using a philosophy known as: E. measures the correlation between a cost driver and a cost
A. supply pull. pool.
B. demand pull.
C. supply push. Answer: D LO: 8 Type: RC
D. demand push.
E. none of the above. 30. Which of the following is not a key feature of a JIT system?
A. Purchases of materials in relatively large amounts (i.e., lot
Answer: B LO: 8 Type: N sizes).
B. A smooth, uniform production rate.
27. Which of the following statements regarding the pull method is C. Total quality control.
(are) true? D. Multiskilled workers and flexible production facilities.
E. A pull approach to coordinating steps in the production
I.Goods are produced in each manufacturing stage only as they process.
are needed at the next stage.

142 Hilton, Managerial Accounting, Seventh Edition


Answer: A LO: 8 Type: RC are needed in production.

31. Which of the following statements regarding a JIT system is (are) Answer: E LO: 8 Type: RC
true? 34. Which of the following statements is (are) true about JIT
purchasing as compared with conventional purchasing systems?
I.Materials are purchased and goods are produced only as
required. I.Quality control by the supplier is more crucial.
II.Employees are highly skilled at single tasks in an effort to II.Adherence to delivery schedules by vendors is more crucial.
maintain quality control. III.Long-term supplier contracts are common.
III.A JIT system is characterized by many small purchases of raw
materials. A. I only
B. II only.
A. I only. C. III only.
B. I and II. D. I and II.
C. I and III. E. I, II, and III.
D. II and III.
E. I, II, and III. Answer: E LO: 8 Type: N

Answer: C LO: 8 Type: RC 35. Which of the following statements about a just-in-time (JIT)
purchasing system is false?
32. Which of the following statements regarding quality is (are) true A. Since there is minimal backup, companies must acquire
for a company that has implemented a JIT system? quality raw materials.
B. Raw materials are stockpiled to avoid production disruptions.
I.JIT requires quality production facilities, methods, and C. In comparison with experiences under traditional systems,
employees. manufacturers normally deal with a reduced number of
II.JIT requires the acquisition of quality raw materials. suppliers.
III.JIT requires that long-term contracts be negotiated with quality D. Supplier reliability tends to be more important under a JIT
suppliers. system than under a traditional purchasing system.
E. The average purchase size is smaller with a JIT system than
A. II only. under a traditional purchasing system.
B. I and II.
C. I and III. Answer: B LO: 8 Type: RC
D. II and III.
E. I, II, and III. 36. Hudson, Inc., is considering a change from a traditional
purchasing system to a just-in-time purchasing system. What has
Answer: E LO: 8 Type: RC probably happened to Hudson's cost per purchase order and
inventory unit storage cost to prompt the company to consider
33. A firm that uses a JIT purchasing philosophy probably: such a change?
A. has many suppliers. A. Purchase-order cost is increasing and unit storage cost is
B. has extensive inspection of purchased items at the receiving increasing.
point. B. Purchase-order cost is increasing and unit storage cost is
C. has relatively few suppliers. decreasing.
D. has deliveries of purchased items made in small lot sizes C. Purchase-order cost is decreasing and unit storage cost is
immediately before the goods are needed in production. increasing.
E. has relatively few suppliers and has deliveries of purchased D. Purchase-order cost is decreasing and unit storage cost is
items made in small lot sizes immediately before the goods decreasing.

Chapter 6 143
E. Both of these costs are relatively stable in amount.

Answer: C LO: 8 Type: N

37. When a company adopts a just-in-time inventory system, it would


expect:
A. higher inventories and less frequent purchases.
B. higher inventories and more frequent purchases.
C. lower inventories and less frequent purchases.
D. lower inventories and more frequent purchases.
E. lower inventories and more units purchased on a given order.

Answer: D LO: 8 Type: N

144 Hilton, Managerial Accounting, Seventh Edition


41. When a company switches from a traditional system to a just-in-
38. When a company adopts a just-in-time inventory system, it would time production and inventory system, what often happens to the
expect: quality of raw material purchased and the number of vendors that
A. higher inventories and fewer units purchased on a given supply the firm?
order. Quality of Number of
B. higher inventories and more units purchased on a given Purchases Suppliers
order. A. Increase Increase
C. lower inventories and fewer units purchased on a given order. B. Increase Decrease
D. lower inventories and more units purchased on a given order. C. Decrease Increase
E. lower inventories and less frequent purchases. D. Decrease Decrease
E. Increase Remain the same
Answer: C LO: 8 Type: RC
Answer: B LO: 8 Type: RC
39. Roger Corporation recently abandoned its traditional production 42.
and inventory system in favor of a just-in-time system. The 43. Which of the following would not typically be used or encountered
company typically dealt with 50 suppliers and placed 450 orders by a firm that is in the service industry?
throughout the year. All other things being equal, which of the A. Customer profitability analysis.
following choices denotes a likely scenario under the just-in-time B. Activity-based management.
system? C. Non-value-added activities.
Number Number of Orders D. Value-added activities.
of Suppliers E. None of the above, as all would typically be used or
A. 35 200 encountered by a service provider.
B. 35 750
C. 50 450 Answer: E LO: 9 Type: RC
D. 60 200
E. 60 750
EXERCISES
Answer: B LO: 8 Type: N
Value-Added and Non-Value-Added Activities
40. Harold Corporation recently abandoned its traditional production
and inventory system in favor of a just-in-time system. The 44. Consider the nine activities that follow.
company typically ordered 700 units of raw material at a time and
purchased units that scored a 7 on a 10-point quality scale, with 1. Microsoft: Developing computer coding for a new
10 being very close to perfection. All other things being equal, spreadsheet package
which of the following choices denotes a likely scenario under the 2. General Mills: Painting the office of a maintenance
just-in-time system? supervisor at a plant that produces cereal
Order Quality Purchased 3. Mayo Clinic: Examining a new patient
Size 4. American Airlines: The 90 minutes that a Boeing 757 sits
A. 300 7 idle on the ground between flights
B. 300 9 5. Office Depot: Moving cases of paper from one location to
C. 700 9 another in the same warehouse
D. 950 7 6. Rolex: Attaching a watch band to the watch’s face
E. 950 9 7. United States Postal Service: Reprocessing mail that had
been sorted incorrectly on a malfunctioning sorting
Answer: B LO: 8 Type: N machine.

Chapter 6 145
8. Fidelity Investments: Correcting errors made by company Number of
personnel in customer accounts Warehousing inventory
9. Marriott: Upgrading the quality of bedding used at hotels moves 8,000 60
in very competitive marketplaces
Outgoing Number of
Required: shipments shipments 18,000 30
Categorize each of the activities as either value-added or non-
value-added for the companies noted. Bookstore sales totaled $8,400,000, and sales to individuals
amounted to $2,400,000. Costs for the three activities were:
LO: 3 Type: N Incoming receipts, $450,000; warehousing, $520,000; and
outgoing shipments, $630,000. A review of the company's
Answer: activities found various inefficiencies with respect to the
warehousing of textbooks (acquired for eventual sale to
1. Value-added 6. Value-added
bookstores) and outgoing shipments to individuals. These
2. Non-value added 7. Non-value-added
inefficiencies resulted in an extra 500 moves and 400 shipments,
3. Value-added 8. Non-value-added
respectively.
4. Non-value-added 9. Value-added
5. Non-value-added
Required:
A. What is a non-value-added activity?
B. How much did non-value-added activities cost Switzer this
past year?
Non-Value-Added Activities; Customer Profitability
C. Which of the two markets—sales to bookstores or sales to
individuals—resulted in lower overall costs for incoming
44. Switzer, Inc., which sells books to college bookstores and
receipts, warehousing, and outgoing shipments? Evaluate
individuals, uses activity-based costing and activity-based
these costs in both absolute dollars and as a percentage of
management. The following information is available for the
sales. In addition, present a possible explanation for your
company's three cost pools:
results. Note: Exclude costs that arose from inefficient
operations.
Percent of Cost-
Cost-Driver Driver Activity for LO: 3, 4 Type: A, N
Quantity Bookstore
Activity Cost Driver Transactions
Number of
Incoming purchase
receipts orders 3,000 20%
Answer:
A. Non-value-added activities can be defined as activities that are either (1) unnecessary and
dispensable or (2) necessary but inefficient and improvable. Put simply, such activities can be
eliminated without harming overall quality, performance, or perceived value.

B. Cost of non-value-added activities:

Incoming receipts: $450,000  3,000 purchase orders = $150 per purchase order
Warehousing: $520,000  8,000 inventory moves = $65 per move
Outgoing shipments: $630,000  18,000 shipments = $35 per shipment

146 Hilton, Managerial Accounting, Seventh Edition


Warehousing: 500 moves x $65 $32,500
Outgoing shipments: 400 shipments x $35 14,000
Total $46,500

C. Sales to bookstores produced lower overall costs in both absolute dollars and as a percentage of
sales. A possible explanation lies in the fact that sales to individuals resulted in the sale of one or
two copies per shipment and order. In contrast, bookstore sales likely produced greater revenues
and efficiencies because of the large number of texts sold per transaction.
Driver- Driver-
Cost-Driver Quantity: Quantity:
Activity Quantity % Bookstores % Individuals Bookstores Individuals
Incoming receipts 3,000 20% 80% 600 2,400
Warehousing 8,000 60% 40% 4,300* 3,200
Outgoing shipments 18,000 30% 70% 5,400 12,200**

* (8,000 moves x 60%) - 500


**(18,000 shipments x 70%) - 400
Bookstores Individuals
Incoming receipts:
600 purchase orders x $150 $ 90,000
2,400 purchase orders x $150 $360,000
Warehousing:
4,300 moves x $65 279,500
3,200 moves x $65 208,000
Outgoing shipments:
5,400 shipments x $35 189,000
12,200 shipments x $35 427,000
Total cost $558,500 $995,000
Cost as a percentage of sales:
$558,500  $8,400,000 6.65%
$995,000  $2,400,000 41.46%

Customer Profitability Analysis Rate per Unit


Customer Activity Cost Driver of Cost Driver
45. Clark Corporation manufactures cooling system components. The Sales activity Sales visits $900
company has gathered the following information about two of its Order taking Sales orders 250
customers: Engle Equipment and Midwest Refrigeration. Special handling Units handled 30
Special shipping Shipments 600
Engle Equipment
Refrigeration
Sales revenue $215,000 Engle Midwest
Cost of goods sold 95,000 Customer Activity Equipment Refrigeration
General selling costs 30,000 Sales activity 8 visits 5 visits
General administrative costs 21,000 Order taking 17 orders 22 orders
Special handling 600 units 550 units
Cost-driver data used by the firm and traceable to Engle and Midwest are: Special shipping 19 shipments 30 shipments

Chapter 6 147
special handling and shipping) as a percentage of gross
Required: margin.
A. Perform a customer profitability analysis for Clark. Compute C. On the basis of your calculations, which of the two customers
the gross margin and operating income on transactions is "more costly" to deal with? Briefly explain.
related to Engle Equipment and Midwest Refrigeration.
B. Compute gross margin as a percentage of sales revenue. LO: 4 Type: A, N
Then compute (1) general selling and administrative costs as
a percentage of gross margin and (2) total customer-related Answer:
costs (i.e., costs that arise from sales visits, order taking, and
A. In dollar terms, Engle's gross margin and operating income are greater than those of Midwest
Refrigeration.
Engle Midwest
Equipment Refrigeration
Sales revenue $215,000 $154,000
Cost of goods sold 95,000 68,000
Gross margin $120,000 $ 86,000
Selling and administrative costs:
General selling costs $ 30,000 $ 21,500
General administrative costs 21,000 15,050
Customer-related costs:
Sales visits (8, 5 x $900) 7,200 4,500
Order taking (17, 22 x $250) 4,250 5,500
Special handling (600, 550 x $30) 18,000 16,500
Special shipping (19, 30 x $600) 11,400 18,000
Total $ 91,850 $ 81,050
Operating income $ 28,150 $ 4,950

B. Gross margin as a % of sales revenue:


Engle: $120,000 ÷ $215,000 = 55.81%
Midwest: $86,000 ÷ $154,000 = 55.84%

General selling and administrative costs as a % of gross margin:


Engle: ($30,000 + $21,000) ÷ $120,000 = 42.5%
Midwest: ($21,500 + $15,050) ÷ $86,000 = 42.5%

Customer-related costs as a % of gross margin:


Engle: ($7,200 + $4,250 + $18,000 + $11,400) ÷ $120,000 = 34.0%
Midwest: ($4,500 + $5,500 + $16,500 + $18,000) ÷ $86,000 = 51.7%

C. Both customers produce approximately the same rate of gross margin on sales and are
charged with the same percentage of general selling and administrative costs. The
difference lies in the area of customer-related costs. Midwest's costs make the firm a more
expensive client to deal with than Engle. Given the dollar volume of sales revenue that is
generated, Midwest's special handling and shipping needs (especially the latter) are an
expensive proposition for Clark Corporation.

148 Hilton, Managerial Accounting, Seventh Edition


Customer Profitability Data: Computation and Analysis

46. Homestead Corporation sells a line of power tools to home Total $245,10 $918,00 $457,80
improvement chains, generating a cost of goods sold equal to customer- 0 0 0
70% of net sales. The selected data that follow relate to the related costs
period just ended for the company's three largest customers:
Weekend Project, Tool Mart, and Fix-It City. Homestead's management recently attended a seminar and
learned that customers with excessive requests and demands can
Weekend Tool Mart Fix-It have a significant, negative impact on corporate profitability.
Project City
Gross sales Required:
volume: A. For each of the three chains, compute:
Dollars $2,000,00 $4,900,00 $4,600,00 1.Total customer-related costs as a percentage of gross
0 0 0 margin.
Number 50 17 125 2.The average order size (ignoring sales returns).
of 5 3.The ratio of regular orders to rush orders.
orders 4.The number of sales returns as a percentage of the number
Type of of total orders.
order: B. Prepare a brief summary of your findings. Should Homestead
Regular 40 13 110
work with any of the chains in an effort to improve results?
5 Explain.
Rush 10 4 15
0 LO: 4 Type: A, N
Sales
returns:
Dollars $100,00 $400,00 $240,00
0 0 0
Number 3 20 8
of Answer:
returns
A. 1. Customer-related costs as a percentage of gross margin:
Weekend Project: $245,100 ÷ [($2,000,000 - $100,000) x 30%] = 43%
Tool Mart: $918,000 ÷ [($4,900,000 - $400,000) x 30%] = 68%
Fix-It City: $457,800 ÷ [$4,600,000 - $240,000) x 30%] = 35%

2. Average order size:


Weekend Project: $2,000,000 ÷ 50 orders = $40,000
Tool Mart: $4,900,000 ÷ 175 orders = $28,000
Fix-It City: $4,600,000 ÷ 125 orders = $36,800

3. Ratio of regular orders to rush orders:


Weekend Project: 40:10 = 4:1
Tool Mart: 135:40 = 3.375:1
Fix-It City: 110:15 = 7.33:1

4. Number of sales returns as a percentage of total orders:

Chapter 6 149
Weekend Project: 3 ÷ 50 = 6% Target Costing
Tool Mart: 20 ÷ 175 = 11.4%
Customer Analysis Fix-It City: 8 ÷ 125 = 6.4% 48. In the not-too-distant future, Victor Enterprises will introduce a
new printer for desktop computers. This printer is expected to
47. Beaverton
B. Customer-related
Manufacturingcosts
is a relatively
are drivennewby events
customer
(andof costs)
Haxton directly traceable to clients.
compete Insuccessfully with other models that are anticipated to sell
Enterprises.
this case,
In the
Toolshort
Mart'speriod
coststhat
as athe
percentage
two companies
of grosshave
margin are much higher (68%)for $250.
than Victor's printer has several unique features, and
done business
those of Weekend
with each Project
other, Haxton
and Fix-It
hasCity.
foundThis
Beaverton
result istonot
be,surprising given that
management
the firm believes that a slightly higher selling price (10%) is
in management's
creates a large
words,
number
"an expensive
of small orders
proposition."
($28,000Numerous
vs. $36,800 and $40,000) forjustified. The company's normal profit margin is 30% of selling
sales visits
Homestead
are typically
to process.
requiredIn addition,
to "close relative
a deal," to
with
theselling
other two firms, Tool Mart relies
price.more
prices heavily
and discounts
on rushoffered
orders,being
whichamong
likely creates
the most additional
attractive cost.
in Finally, a number of Tool
the industry.
Mart's orders
Complicating
(11.4%)matters,
eventually
Beaverton
result inissales
slowreturns,
to settleagain
its creating additional
Required:
account,
processing
orders inexpense
small quantities,
for Homestead.
and oftenIn summary,
has numerousTool Mart seems to be an outlier
A. What
in is the printer's target price, target profit, and target
specialized
relation
shipping
to Weekend
and handling
Project needs.
and Fix-It City, and management should approach Toolcost? Mart
to see if the firm can change its ways of doing business. B. Suppose that Victor's engineers and cost accountants
A recent customer profitability analysis has painted a very conclude that the present design of the printer will result in a
negative picture of Beaverton Manufacturing, and Haxton's unit cost of $210. Explain the concept of "value engineering"
managers are questioning whether an on-going relationship with and be sure to note how it can assist Victor Enterprises in
the firm is warranted. achieving its goals.

Required: LO: 5 Type: A, N


A. Briefly explain why the customer profitability analysis painted
a negative picture of Beaverton Manufacturing. Answer:
B. What actions are available to Haxton Enterprises to improve A. Target price: $250 + ($250 x 10%) = $275
Beaverton profitability? Target profit: $275 x 30% = $82.50
Target cost: $275 - $82.50 = $192.50
LO: 4 Type: N
B. Victor's present cost is too high to achieve the desired profit
Answer: margin, meaning that some form of cost reduction is needed.
A. Profit is a function of two basic factors—revenues and Value engineering is a cost-reduction and process-
expenses—and Haxton is being squeezed on both elements. improvement technique that may allow the company to
Prices are low, discounts are high, and order sizes are small. produce the printer at its targeted cost of $192.50. Engineers
Furthermore, the costs of working with Beaverton are high, will examine the unit in terms of parts and process
courtesy of numerous sales calls being required to produce a complexity, putting forth recommendations of where changes
sale, a slow-paying customer, and specialized handling and can be made.
shipping needs.
Target Costing
B. Haxton should attempt to work with Beaverton in a cost-
cutting drive, explaining that favorable terms can only be 49. Hudson Valley sells barbeque grills in an increasingly competitive
extended for a short period of time. Acceleration of amounts environment. For a number of years, management has followed a
due, increases in order size, and reductions in sales visits and successful policy of marking up goods by 20% of cost, the
specialized handling and shipping needs are possible topics company’s desired gross margin.
for discussion/improvement. If Haxton is unsuccessful in its
efforts, price hikes and/or elimination of discounts may be in One of the firm’s products, grill no. 56, has direct-material
order. charges of $80, direct-labor cost of $50, and manufacturing
overhead of $70. This grill is designed to compete against others
in the marketplace that wholesale for an average of $220. In the

150 Hilton, Managerial Accounting, Seventh Edition


last year or so, management has observed a decline in unit sales
volume despite a very favorable write-up in both Grillmaster
 Two warehouse employees (total annual salary cost of
$43,000) will be transferred elsewhere in the firm.
magazine and Consumer Watchdog.
 Annual property taxes and insurance are expected to fall
Required: by $18,900.
A. Explain a probable cause of the decline in unit sales volume.
B. What would be the likely selling price if the firm uses target
 In order to keep valued customers, Navigator will
occasionally have to use air freight when an out-of-stock
costing?
situation arises, resulting in added cost for the company of
C. What must happen to the current manufacturing cost if
$2,300.
Hudson Valley were to achieve its 20% gross margin, now
computed on the basis of sales? By how much?
Required:
LO: 5 Type: A, N A. Determine whether it is financially advantageous
over a 12-month period for Navigator to adopt the just-in-
Answer: time system.
A. The problem does not seem to be quality-related because of B. How would Navigator describe the "ideal supplier" if
the grill’s favorable reviews. Rather, Hudson Valley is in a the company adopts the just-in-time system.
very competitive marketplace and appears to be over-pricing
the grill somewhat for the intended market segment. That is, LO: 8 Type: A, N
the costs of grill no. 56 total $200 ($80 + $50 + $70). With
a 20% markup added, the selling price becomes $240 [$200 Answer:
+ ($200 x 20%)] when the average selling price is $220. A. Lost profits (5,500 units x $(126,500)
$23)
B. $220 Return on funds ($700,000 x 91,000
13%)
C. If the selling price is $220 and the company has a 20% gross Lease savings ($3,000 x 12) 36,000
margin on sales of $44 ($220 x 20%), the grill’s costs must Savings in taxes and 18,900
total $176 ($220 - $44). Thus, current costs must drop by insurance
$24 ($200 - $176). Air freight costs (2,300)
Total $ 17,100
Just-in-Time Purchasing System
The just-in-time system is financially advantageous to the
50. The wholesale division of Navigator Enterprises is considering the firm, saving $17,100. Note: The cost of the warehouse
installation of a just-in-time purchasing system. The company's employees is ignored because regardless of whether the
accountant has provided the following figures if the system is system is adopted, Navigator will incur the cost.
adopted:
 Sales lost because of out-of-stock situations will total 5,500 B. The "ideal supplier" is one that delivers top quality goods
units, with each unit producing an average profit for the firm precisely when needed. Thus, reliability is a key with respect
of $23. to quality and delivery, as is close proximity to the wholesale
division. Most JIT suppliers are willing to sign long-term
 The overall inventory will drop by $700,000. Navigator
contracts and accept "batched" payments for deliveries.
can invest these funds elsewhere and produce a return of
13%.
 A leased warehouse (monthly rent of $3,000) will no Just-in-Time Purchasing System
longer be needed.
51. Management of Laredo Enterprises recently decided to adopt a

Chapter 6 151
just-in-time inventory policy to curb steadily rising costs and free- materials should give rise to fewer warranty and repair
up cash for purposes of investment. The company anticipates problems after Laredo's finished product is sold, resulting in a
that inventory will decrease by $4,450,000, with the released net savings for the firm of $38,000.
funds to be invested at a 10% return for the firm. Additional data 6. Because of the need to handle an increased number of small
follow. shipments from suppliers, Laredo will remodel production and
1. Reduced inventories should produce savings in insurance and receiving-dock facilities at a cost of $750,000. The
property taxes of $46,000. construction costs will be depreciated over a 10-year life.
2. Reduced raw-material inventory levels and accompanying
stockouts will cost Laredo $85,000. Required:
3. Laredo will lease 80% of an existing warehouse to another A. Compute the annual financial impact of Laredo's
firm for $2.50 per square foot. The warehouse has 40,000 decision to adopt a just-in-time inventory system.
square feet. B. In comparison with those of a traditional purchasing
4. Four employees who currently earn $35,000 each will be system, why would the number and size of incoming supplier
directly affected by the just-in-time adoption decision. Three shipments change under a just-in-time system?
employees will be transferred to other positions with Laredo;
one will be terminated. LO: 8 Type: A, N
5. A shift in suppliers is expected to result in the purchase and
use of more expensive raw materials. However, these Answer:
A. Return on released funds ($4,450,000 x 10%) $445,000
Savings in insurance and property taxes 46,000
Added stockout costs (85,000)
Lease revenue (40,000 square feet x 80% x $2.50) 80,000
Salary savings* 35,000
Net savings in materials, warranty, and repair costs 38,000
Depreciation on remodeled facilities
($750,000 ÷ 10 years) (75,000)
Savings from JIT system $484,000

*Note: The cost of the three transferred employees is excluded because Laredo will continue to
have these individuals on the payroll.

B. Under a traditional purchasing system, goods are purchased (frequently in largeRequired:


lots) and then
placed in inventory until used. In contrast, with JIT, costly inventories are avoided
A. by
Compute
having the average order size under both the current
the materials arrive "just in time" to be issued to production. Materials are therefore
system and the proposed just-in-time system. Also, calculate
purchased only when needed, which often translates into numerous small acquisitions the change in annual purchase-order processing cost.
throughout the period. B. Explain why the number of orders will increase under a just-
in-time system.
Analysis of Just-in-Time Purchasing System C. What benefits might Putnam experience to help offset the
increase in purchase-order processing cost?
52. Putnam Enterprises currently purchases a total of 50,000 sensors D. What might Utah do to the $80 price, given the company's
annually from Utah Electronics at $80 per unit. The firm places 25 need to process an additional 175 orders?
purchase orders during the year at an average cost of $10 per
order. Putnam's management is contemplating a switch to a just- LO: 8 Type: A, N
in-time purchasing system that would require an increase in
orders to 200. Answer:

152 Hilton, Managerial Accounting, Seventh Edition


A. Current system: 50,000 sensors ÷ 25 orders = 2,000 units 54. Non-value-added costs occur in nonmanufacturing organizations
Just-in-Time Purchasing,
Just-in-time system:
Non-Value-Added
50,000 sensors
Activities
÷ 200 orders = 250 units as well as in manufacturing firms.

53. Fargo Just-in-time


Enterprises, system:
which manufactures
200 orders xlawn
$10 mowers, recently $2,000 Required:
installed
Current
a just-in-time
system: 25purchasing
orders x $10
system and an activity-based 250 A. Explain what is meant by a non-value-added cost.
management
Increaseprogram.
in purchase-order processing cost $1,750 B. Identify two potential non-value-added costs for each of the
following service providers: airlines, banks, and hotels.
Required:
B. Under a traditional system, orders are large so that adequate inventories can be maintained. By
A. Determine
increasingwhether
the numberthe following
of orders,items
companies
would be
anticipate
apt to that units will arrive on LO:
an as-needed
3, 9 Type: RC, N
increase
basis, thus
or decrease
reducingas thea need
resultto ofcarry
the just-in-time
sizable on-hand
system:
stocks.
1. Inventory storage costs.
C. 2.A reduction
Numberin inventories
of suppliers will
used.
typically decrease associated costs such as warehousing,
3.insurance,
Number
obsolescence,
of raw material
and property
shipments
taxes.
handled.
In addition, monies currently invested in
4.inventories
Dollars
will available
be releasedfor for
alternative
other profitable
investment
uses by management. Putnam may also
negotiate
opportunities.
that a higher quality sensor be acquired, which would both reduce the need for
5.inspections
Quality
andof increase
raw materials
the overall
purchased.
quality of the firm's finished product.

D.
B. Identify
Utah's cost
the following
will likelyitems
increase,
as value-added
given that overall
activities,
volume
non-is constant at 50,000 sensors. As a
value-added
result, the firm
activities,
might or be both.
forced to raise the sensor's selling price.
1. Attaching the engine to the mower's body.
2. Installing a new air-conditioning system in the
executive offices.
3. Replacing a defective wheel with a new wheel.
4. Designing and printing an owner's instruction manual
for a new model.
5. Moving completed mowers to the finished-goods
warehouse.
6. Attaching the handle to the mower's body. The
process took longer than normal because of a worker
slowdown caused by disgruntled employees.

LO: 3, 8 Type: N

Answer:
A. 1. Decrease B. 1. Value-added
2. Decrease 2. Non-value-added
3. Increase 3. Non-value-added
4. Increase 4. Value-added
5. Increase 5. Non-value-added
6. Both

DISCUSSION QUESTIONS

Non-Value-Added Costs

Chapter 6 153
improvable. These activities give rise to non-value-added costs,
Answer: which cut into company profitability. Non-value-added activities
A. Non-value-added costs are the costs of activities that can be should be reduced and/or eliminated through various process
eliminated with no deterioration of product quality, improvement techniques. Activities may also be shared in some
performance, or perceived value. These activities should be cases, with selected functions being combined and performed in a
eliminated to save time and money. General examples more efficient manner.
include the costs of inspection, moving, waiting, and storing.
Kaizen Versus Re-engineering
B. Airlines:
 The cost of preparing excess food because of forecasting 56. Briefly distinguish between kaizen and re-engineering.
errors in passenger loads.
 The cost of tracing, returning, repairing, or replacing lost LO: 6, 7 Type: RC
or mishandled luggage.
 Additional compensation paid to flight crews attributable Answer:
to cancellations or delays from problems that should have Kaizen refers to the process of cost reduction during the
been prevented by routine maintenance. manufacturing phase of an existing product. This process takes
place gradually, or through small continual improvements rather
Banks: than through radical change. Re-engineering, on the other hand,
 The cost of correcting bank errors in customer accounts. is a bit more drastic, often involving the complete redesign of a
 The cost of performing manual banking procedures process in hopes of finding a creative new way to accomplish an
necessitated by computer system downtime. objective. Generally speaking, re-engineering often prescribes
 Losses caused by employee embezzlement and petty radical, quick, and significant change.
thefts.
 Defaulted loans made to borrowers who should have Just-in-Time Production
been classified as poor risks by existing credit-granting
procedures. 57. A just-in-time production system uses a "pull method" to
coordinate steps in the manufacturing process. Explain what is
Hotels: meant by the term "pull method."
 Broken dishes and glassware, loss of or damage to
linens and towels. LO: 8 Type: RC
 The cost of replacing lost room keys.
 The cost of overstaffing the front desk during Answer:
nonpeak hours. Under the pull method, goods are produced in each manufacturing
 Excess food costs, including preparation. stage only as they are needed at the next stage. When materials
and parts are required for final assembly, for example, a message
Non-Value-Added Activities is sent to the preceding work center to send items that will satisfy
the work to be performed over the next few hours. This approach
55. What are non-value-added activities? What should companies do drastically cuts work-in-process inventory along with waiting time
with these activities and, in general terms, how should this be (a non-value-added cost). The "pull approach" is repeated all the
done? way through the manufacturing process, back toward the
beginning.
LO: 3 Type: RC

Answer:
Non-value-added activities are operations that are either (1)
unnecessary and dispensable or (2) necessary, but inefficient and

154 Hilton, Managerial Accounting, Seventh Edition